Best Practices for Choosing, Implementing and Using E-Sourcing Solutions

This research will help IT and business stakeholders maximize the ROI and adoption of strategic and tactical sourcing solutions.

• Many factors influence the ROI and adoption rates of e-sourcing solutions. Top factors include selecting a suitable vendor, provisioning services to help users configure the tool for events, making usage mandatory and tracking the savings that result from usage.

• Select a solution provider using appropriate criteria. Although e-sourcing solutions can be relatively mature, they are not all alike.
• Configure your e-sourcing solution to support best business practices, track savings and integrate in useful ways with related applications.
• Set appropriate policies for e-sourcing tools, such as making usage mandatory, providing proper training or resources for reverse auctions, and selectively taking on project sourcing and strategic sourcing opportunities.

Implementing and utilizing an e-sourcing solution is one of the easiest ways to dramatically improve cost savings and enhance the professionalism of the procurement organization. When used properly, e-sourcing solutions can increase procurement productivity by 100% or more, and can drive significant, measurable cost savings.

For example, a large dealer of heavy equipment and diesel engines implemented an e-sourcing solution to source equipment delivery. The e-sourcing solution dramatically increased the number of times the dealer could take advantage of inexpensive backhaul prices (lower prices as a result of catching a truck returning empty from another delivery), because it could routinely solicit bids from 50 or more truckers, whereas before, the average number of vendors it could contact manually for a particular job was five.

Solution selection, configuration and usage policy choices can dramatically impact the ROI of e-sourcing solutions. Here, we summarize the best practices learned from years of interactions with approximately 1,000 end-user clients striving to get the most from their e-sourcing investments.

Organizations typically employ a variety of approaches to establishing pricing and sources of supply. The varying approaches can be logically grouped into three types: tactical, project and strategic sourcing. Tactical sourcing involves finalizing the source of supply and pricing for a discrete, near-term requirement. Processes that fall under tactical sourcing include "three bids and a buy" and price checks. Project sourcing refers to the work involved in choosing a supplier for a one-time buy, such as an investment in a CRM software application. Strategic sourcing refers to sourcing activities that result in one or more long-term agreements spanning multiple deliveries (for example, a global sourcing project to select five telecom vendors for two-year, enterprise service agreements).

A single e-sourcing tool is unlikely to support all sourcing processes, because the IT architectural requirements differ between the three sourcing types (see Figure 1). For example, a large healthcare insurance provider grew frustrated because its tactical sourcing tool required an approved requisition before an RFP could be issued, and most of its project-based sourcing initiatives did not involve requisitioning. Tactical sourcing is very transactional in nature, and is often delivered as a feature of purchasing and e-procurement applications. Strategic sourcing solutions are architected to support ad hoc process steps, document management and project management. Users that need to solicit a few bids will be frustrated with the complexity of strategic sourcing solutions, and category managers who are leading sourcing projects may find tactical tools completely inadequate. Occasionally, a single tool can be configured or customized to support all sourcing types, but this is not the typical situation currently. Before investing in a tool, ensure that you understand what type(s) of sourcing will be supported.

Figure 1. The Three Sourcing Process Types

Source: Gartner (January 2011)

Very few organizations, even those that are long-term veterans of using strategic sourcing applications, have procurement teams that are fully comfortable using a solution without some sort of resource for configuring events. Ninety-six percent of references from our 2010 Magic Quadrant for Strategic Sourcing Application Suites indicated that they have a formal source of services to help users configure the application (see Figure 2 and the Evidence section).

Figure 2. Source of Strategic Sourcing Application Product Services

Source: Gartner (January 2011)

These services can come from an internal center of excellence, the technology vendor or a third party. This resource should help with lotting strategy, supplier training and auction type choice, if reverse auctions are used. Without business services to help users configure the tool, align event decisions to organizational strategy and select the most appropriate type of event, productivity rates and adoption levels suffer.

Prospective buyers of e-sourcing solutions will find the market brimming with interesting choices. Narrow your list of providers to those that are most suitable by defining your requirements for the following criteria:

• Suitability of the broader suite for your needs. Most strategic sourcing solutions are delivered as an element of a broader suite with related applications, such as procure to pay, contract management and spend analysis. Shortlist vendors with strength in the applications that are on your road map.
• Appropriate level of services. Some e-sourcing vendors, such as Global eProcure, lead with business services and prefer engagements that entail both services and technology. Other vendors, such as Oracle, sell technology only and recommend partners for services.
• Suitable delivery mode. Software as a service (SaaS) is the most common delivery mode in the strategic sourcing solutions market. Prospective buyers preferring an on-premises solution should not waste time pursuing SaaS-only vendors.
• Appropriate level of advanced functionality. Some solutions are differentiated through advanced functionality, such as bid optimization, project management dashboards and demand aggregation. Bid optimization is useful for complex spending categories like transportation. Project management dashboards allow leaders to track the progress of multiple sourcing projects, and demand aggregation supports the coordination of product/service forecasting across multiple groups. Solutions that offer advanced functionality typically command a premium over simpler tools.
• Appropriate architecture for scale. Larger organizations may run hundreds of events simultaneously and/or conduct reverse auctions that attract dozens of prospective suppliers and thousands of bids. An appropriate solution for large-scale implementations will offer features such as navigation for prospective suppliers to find the right event, and will offer enough on-demand bandwidth to maintain system performance in large events.

Many e-sourcing solutions are highly configurable, with embedded workflow and mandatory data submission. Establish solution configuration to support appropriate business processes (see "Reaching Sourcing Excellence, Part 1: How to Keep 30 Cents of Every Dollar Spent"), and take advantage of solution functionally to ensure that best business practices, such as the following, can be observed:

• Management review of sourcing plans, prior to kicking off a strategic sourcing project.
• Nonprice factor consideration, through scoring of criteria such as quality and service.
• Team scoring of supplier proposals, to involve stakeholders in important sourcing decisions.
• Project archive, to document and store key data, such as the business case for the purchase, the award scenarios evaluated and the selection criteria used for the award.
• Varying sourcing formats so that it is difficult for prospective suppliers to "game" events (for example, changing the mix of prospective supplier event participants, and changing sourcing event types between RFPs and reverse auctions, can ensure fully competitive events).
• Set up panel sourcing for tactically sourced items, and delegate requests for quotation (RFQs) to requisitioners; in other words, configure the solution so that requisitioners can solicit quotes from preferred suppliers only.
• Strategically source whenever you can; tactically source when you must. Sourcing strategically allows you to get the full benefit of aggregated demand and economies of scale.
• Establish terms and conditions of business prior to the sourcing event, and communicate these in requirements documents.

There is no such thing as a tool that is so easy to use that everyone just uses it. Even the most user-friendly tool can still be intimidating to someone who is unfamiliar with it. Don't waste resources implementing an e-sourcing solution if your organization is unwilling or unable to mandate usage. For example, a large pharmaceutical company dramatically improved its e-sourcing solution ROI when it changed its usage policy from voluntary to mandatory. However, be considerate of your users by heavily weighting usability in your solution choice, providing training for the tool and leveraging change management techniques to help users adjust to new expectations.

Strategic sourcing solution integration with related applications, such as enterprise contract management, spend analysis and supply base management applications, can enhance the value of the implementation by reducing manual steps and improving productivity. For example, strategic sourcing tools can automatically populate contracts with winning bid data, and data gathered in an RFI can be leveraged in a supplier information management tool.

Likewise, tactical sourcing solutions work very well as an integrated feature of a purchasing or e-procurement application, because requisition data does not need to be retyped into the RFQ, and winning bid data can be automatically downloaded into the purchase order (see Figure 3).

Figure 3. Persistent Data of the Procure-to-Pay Process

Source: Gartner (January 2011)

Integrations outside of these are not common and may not add much value. For example, leveraging supplier master data in an ERP for the supplier master in a strategic sourcing solution can be marginal, because most organizations solicit bids from a much larger set of vendors than they actually buy from, and because the data needed for the ERP (which is needed to pay the invoice) differs from the data needed in sourcing (which is needed to contact the right person to pull together a proposal). Assess each proposed integration for ROI prior to commitment.

Procurement often mistakenly seeks to build its reputation by supporting whatever sourcing requests come in from internal customers. This approach can result in highly variable workloads and wasted time on marginal projects. Procurement will deliver strong results when it proactively selects what categories and projects it will support, with guidance from internal stakeholders. Suitable projects can be chosen and prioritized through spend analysis, through which categories of spending with too few or too many vendors are identified; through contract management, when contract expiration dates are identified and managed; and by reviewing stakeholder budgets and anticipating major projects. Smart procurement groups may refuse support for last-minute projects that are already negotiated and essentially just need a "rubber stamp" of approval to wrap up. Additionally, procurement groups should take care to understand opportunities in the context of market price trends. For example, it may be better to simply renew a particular contract at current prices, rather than putting the contract out to bid if market prices are rising.

The reverse auction is a powerful tool that can deliver major cost reductions when used appropriately, but can also significantly damage supplier relationships when poorly deployed. The risk of using reverse auctions, in terms of possible damage to supplier relationships, is higher than with RFIs, RFPs and RFQs, because of the relative newness of the tool and the velocity of bidding. Utilize reverse auctions when you have the skills and knowledge to do so. These skills can be developed in-house or bought as a service from vendors such as TradingPartners, e-Three and K2. Best practices for success with reverse auctions include:

• A willingness to switch suppliers; otherwise, you will get a reputation of unfair sourcing practices.
• Using the solution only when requirements are well-defined; poorly defined or overly flexible requirements will result in bids that are not comparable.
• Conducting an auction only when you have multiple, prequalified bidders and a reasonable expectation that lower prices can be achieved. Market indexes can help. For example, a manufacturer was surprised when it conducted a reverse auction for its PCs and the result was a price increase, because it had a good deal originally and market prices had risen.
• Offering training to suppliers in advance of the event.

Tracking the savings that result from the use of e-sourcing tools, and publishing the results to internal stakeholders and the CFO, are critical to gaining credibility in procurement. Although cost is clearly only one consideration in sourcing, it is the most important one. Be careful, however, to report savings results that are believable. The most effective way we've heard is to estimate the final savings for each sourcing event, obtain written approval from the internal customer that the numbers are accurate and defensible, and then track actual savings once purchases have been made. Beware, however, that changes in demand and requirements often lower savings, so it is helpful to factor some buffer into your estimates.

Additionally, consider tracking overall procurement effectiveness by calculating spending under management as spending that has been sourced. The alternative way of calculating this metric, which is to measure spending on purchase orders, often gives a false read of the level of professional procurement involvement in selecting suppliers and negotiating prices, terms and conditions, because spending on purchase orders can be spending that is documented after the fact and/or unreviewed.

The best practices presented in this research are culled from interactions, including inquiries and references, from approximately 1,000 end-user companies. These best practices have been brought up repeatedly by end users who report high levels of satisfaction with their e-sourcing implementations.

The data for the provisioning of business services for strategic sourcing was collected in the process of gathering references for the "Magic Quadrant for Strategic Sourcing Application Suites," and is from 92 end-user respondents from a variety of industries, geographies and organization sizes.

Gartner for RAS Core Research Note G00209613, Deborah R Wilson, 7 January 2011